Quick Facts

Costa Rica’s economy has shown moderate resilience in the face of external economic challenges. Modest reform efforts have continued in several areas that are critical to improving economic freedom. The overall regulatory framework has become slightly more efficient, and business procedures have been streamlined.

Economic Freedom Snapshot

2016 Economic Freedom Score: 67.4 (up 0.2 point)

Economic Freedom Status: Moderately Free

Global Ranking: 50th

Regional Ranking: 10th in the South and Central America/Caribbean Region

Notable Successes: Trade Freedom and Investment Freedom

Concerns: Property Rights, Corruption, and Labor Freedom

Overall Score Change Since 2012: –0.6

Despite uneven progress, implementation of policies that support open markets has facilitated vital entrepreneurship and investment. Costa Rica has lagged, however, in promoting the effective rule of law. The judicial system, while transparent, remains vulnerable to political interference, and lingering corruption hampers the emergence of more vibrant economic activity.

Background

Since beginning his four-year term as president in 2014, Luis Guillermo Solís has faced legislative deadlock. Costa Rica has a long history of democratic stability and one of Latin America’s highest levels of foreign direct investment per capita, but it also has a large underground economy and commensurate poverty. Significant economic reform is long overdue. While Costa Rica remains safer than many of its neighbors, crime is rising. There is an ongoing border dispute with Nicaragua. Costa Rica has benefited from foreign investment in electronics and health care. Its membership in the Central America–Dominican Republic–United States Free Trade Agreement and pending full membership in the Pacific Alliance trade pact have opened sectors such as insurance and telecommunications to private investors.

Thanks to strong institutions, corruption is lower than elsewhere in the region, but public dissatisfaction with the state of the country’s democracy, allegations of official corruption, and rising rates of crime linked to Mexican drug cartels are growing. The judicial branch is independent, but its processes are often slow. Property rights are secure, and contracts are generally upheld although sometimes difficult to enforce.

The top personal income tax rate is 25 percent, and the top corporate tax rate is 30 percent. Other taxes include a general sales tax and a real property tax. The overall tax burden equals 23.2 percent of total domestic income. Government spending amounts to 27.3 percent of total domestic output, and public debt equals approximately 40 percent of GDP. Continuing deficits have prompted structural reforms, particularly in tax administration.

The entrepreneurial environment is relatively streamlined, but regulatory compliance can be costly. Labor codes are stringent. Despite some flexibility in work hours, the non-salary cost of labor remains burdensome. Pursuant to its ongoing commitment to forswear the use of fossil fuels, the government subsidizes the cost to consumers of hydroelectric power generated by the state-owned electric utility.

Costa Rica’s average tariff rate is 4.2 percent. Government procurement procedures may favor domestic producers. State-owned enterprises are active in the energy, telecommunications, banking, and insurance sectors. The growing financial sector has become more open to competition, but it remains dominated by three state-owned banks.